2017 (6) TMI 1259 - HC - Income Tax

Disallowance u/s 14A - Expenses in relation to income not forming part of total income - whether Tribunal erred in not appreciating that the disallowance as computed under Section 14A was in terms of the formula prescribed in Rule 8D of the Income Tax Rules, 1962? - Held that - In view of the fact that the issues involved in the present appeal are covered by the judgment of this Court in the case of M/s. Godrej & Boyce Manufacturing Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT), no substantial questions of law arise in the present appeal

Summary

Issues:
1. Application of Section 14A of the Income Tax Act for Assessment Year 2007-08.
2. Interpretation of Rule 8D of the Income Tax Rules for computing disallowance.
3. Applicability of provisions of subsection 2 and subsection 3 of Section 14A inserted by the Finance Act, 2006.
4. Retroactive application of Rule 8D as per Income Tax (Fifth Amendment) Rule, 2007.

Analysis:

1. The appeal before the Bombay High Court pertained to the Assessment Year 2007-08 and raised questions regarding the application of Section 14A of the Income Tax Act. The Revenue challenged the Tribunal's decision to remand the matter back to the Assessing Officer to compute disallowance under Section 14A. The Tribunal was criticized for not appreciating that the disallowance was made by the Assessing Officer based on interest expenditure related to exempt income. The appellant's counsel acknowledged that the issues were covered by a previous judgment of the Court in a similar case.

2. The Tribunal's decision to ask for the computation of disallowance under Section 14A following the decisions of the Bombay High Court was also questioned in the appeal. The Tribunal was accused of misinterpreting the applicability of Rule 8D of the Income Tax Rules, which was considered a procedural mechanism for computing expenditure related to earning exempt income. The retrospective or prospective effect of Rule 8D in pending proceedings was a point of contention in the appeal.

3. Another issue raised in the appeal was the interpretation of the provisions of subsection 2 and subsection 3 of Section 14A of the Income Tax Act, inserted by the Finance Act, 2006. The Tribunal was accused of misinterpreting these provisions and applying them prospectively to all pending proceedings. The proper application and understanding of these provisions were crucial in determining the computation of disallowance under Section 14A.

4. The Tribunal's failure to appreciate the procedural nature of Rule 8D, inserted by the Income Tax (Fifth Amendment) Rule, 2007, was also a point of contention in the appeal. The appellant argued that Rule 8D should apply retrospectively to all pending proceedings, emphasizing that the disallowance computed under Section 14A followed the formula prescribed in Rule 8D of the Income Tax Rules, 1962. Ultimately, the Court dismissed the appeal, stating that since the issues were covered by a previous judgment, no substantial questions of law arose in the present case.